As we age, unexpected financial needs arise, making it necessary to explore options for cashing out life insurance policies. For seniors, this can mean turning to either a viatical settlement or life settlement. These options provide a way to unlock the value of an existing life insurance policy, offering a financial lifeline in times of need. In this blog post, we will discuss the difference between a viatical settlement and a life settlement, and how to decide which is right for you.
WHAT IS A VIATICAL SETTLEMENT?
A viatical settlement involves selling your life insurance policy to a third party for a lump sum payment that is more than its cash surrender value but less than its net death benefit. Typically, viatical settlements are available to policyholders with a terminal illness and a life expectancy of two years or less. This option allows individuals to receive immediate cash to cover medical expenses, living costs or other financial needs during a critical time.
Pros and Cons of Viatical Settlements
Pros:
- Immediate access to cash: A viatical settlement can provide quick
financial relief, which can be crucial for those facing high medical costs. - Higher payout: Viatical settlements generally offer a higher payout than
life settlements due to the shorter life expectancy of the policyholder. - No restrictions: The funds received can be used for any purpose, giving
the policyholder flexibility. - No income tax due if the insured passes away in two years or less. This is
a major difference between life settlements and viatical settlements.
Cons:
- Loss of death benefit: The policyholder’s beneficiaries will not receive the
death benefit, which might impact financial planning for their loved ones. - Potential tax implications: The proceeds may be subject to taxation,
depending on the policyholder’s circumstances and IRS regulations. - Privacy concerns: The process involves sharing medical records and
personal information with third parties.
WHAT IS A LIFE SETTLEMENT?
Like a viatical settlement, a life settlement involves the sale of an existing life insurance policy by the policyholder to a third party for more than its cash surrender value but less than its net death benefit. However, a life settlement does not require the policyholder to have a terminal illness. This option is typically available to seniors over 65 who no longer need their policy or can no longer afford the premiums, giving them the flexibility to make financial decisions that suit their needs.
Pros and Cons of Life Settlements
Pros:
- Financial relief: A life settlement offers a lump sum payment of 4 to 7
times the cash surrender value, that can help with various financial needs. - Flexibility: The policyholder can use the funds for any purpose, such as
retirement planning, paying off debt or covering medical expenses. - Higher value: Life settlements generally provide a higher value than
surrendering the policy back to the insurance company.
Cons:
- Loss of death benefit: Similar to viatical settlements, the death benefit is
forfeited, affecting the policyholder’s beneficiaries. - Potential tax consequences: The proceeds from the sale might be
taxable. - Lengthy process: The process can be time-consuming, requiring extensive
paperwork and medical records.
CHOOSING BETWEEN A VIATICAL AND LIFE SETTLEMENT
When choosing a viatical settlement vs. a life settlement, it is important to take your circumstances and financial needs into account. Here are some factors to consider:
Your Health Status
When weighing the advantages of a life settlement vs. a viatical settlement, the policyholder’s health status plays a crucial role in determining the most suitable option. Viatical settlements are for individuals with terminal illnesses and a life expectancy of two years or less. The urgency of medical and living expenses often makes this option more attractive for those in critical health situations. Life settlements are for seniors over 65 who are in relatively good health but no longer need their policy or find the premiums unaffordable.
Your Immediate Financial Needs
The decision between a viatical vs. a life settlement typically depends on whether the policyholder is terminally ill or simply looking to cash out their policy during retirement. Viatical settlements can provide quicker access to funds, which is crucial for those facing immediate, high medical expenses. Life settlements are often used for longer-term financial planning, such as supplementing retirement income, paying off debt or covering other large expenses.
The Policy’s Value
Viatical settlements typically offer higher payouts because the buyer anticipates a quicker return on investment due to their shorter life expectancy. But, while the payout for life settlements is typically less than viatical settlements, it is still significantly higher than surrendering the policy for its cash value.
The Impact on Your Beneficiaries
Both viatical and life settlements involve giving up the death benefit, which means your beneficiaries will not receive the policy’s payout upon your death. It’s crucial to discuss this with your beneficiaries to ensure they understand the impact. If maintaining a death benefit for your beneficiaries is important, it may be worth exploring other financial assistance programs or loans against the policy.
The Tax Implications
Both viatical and life settlements can have tax consequences. Generally, a viatical settlement is tax free if the policyholder is terminally ill, as per IRS regulations. On the other hand, a life settlement may be subject to income and capital gains tax. Always consult with a tax advisor to understand the specific tax implications based on your situation. This can help you avoid unexpected tax liabilities and make the most financially sound decision.
Market Conditions
The life settlement market is influenced by interest rates, the availability of buyers and the overall economic environment. Understanding current market conditions can help you gauge the best time to sell your policy. Engaging with an experienced life settlement advisor can provide valuable insights into market trends and help you navigate the complexities of the sale process.
The Regulatory Environment
Both viatical and life settlements are subject to state regulations, which can vary significantly. Ensuring compliance with these regulations is crucial for a smooth transaction. Look for settlement providers that comply with all regulatory requirements and offer transparent processes to protect your interests as a policyholder.
Example Scenario
Consider a 79-year-old policyholder named John with a $1 million life insurance policy. John is in good health but finds the premium payments burdensome. After consulting with a financial advisor, John decides to explore a life settlement. He receives several offers and ultimately sells his policy for $200,000, which he uses to pay off debt and bolster his retirement savings.
In contrast, Mary, a 68-year-old with a terminal illness and a life expectancy of 18 months, opts for a viatical settlement. She sells her $500,000 policy for $350,000, providing her with immediate funds to cover medical treatments and improve her quality of life in her remaining years.
LEARN MORE ABOUT SELLING A LIFE INSURANCE POLICY
If you are considering selling your life insurance policy, understanding the differences between a viatical and life settlement is crucial for making an informed decision. Whether you need immediate cash due to a terminal illness or want to explore options for a policy you no longer need, both choices offer valuable opportunities. A life settlement advisor can help evaluate your unique situation and weigh the pros and cons of each option.
Life Settlement Advisors is experienced in all the complexities of selling life insurance policies. Our life settlement experts can help you navigate the process and determine the best solution. Reach out today to learn more and find out if you qualify.
